How Are Property Taxes Calculated?
Property taxes are one of the main sources of capital for local governments. Property taxes can fund a wide range of public services and programs, such as schools; emergency services; infrastructure projects; green spaces; pest control; government employee payrolls; and more.
Property tax rates vary significantly by state, as well as within a state, since local governments have decision power over tax rates. They can also add potential surtaxes to fund specific initiatives, such as capital infrastructure projects or a school district level surtax to fund school repairs.
But how are property taxes calculated? Levied annually, property taxes are calculated by multiplying the assessed value of the property by the effective tax rate applicable in the property’s region — also referred to as an ad valorem tax — as well as taking into account any exemptions or deductions that the owner or property may qualify for.
What Is the Assessed Value of a Property?
The assessed value of a property is calculated by a government assessor designated by the tax jurisdiction under whose purview the property falls. Generally, the tax assessed value is calculated every one to five years, although some states will only perform assessments in the case of specific events concerning the property, such as a change in ownership. And, while some jurisdictions assess at 100% market value, the assessed value will usually be a fraction of the property’s market value.
The assessed value of a property is determined by a variety of factors, such as recent comparable property sales in the area; the cost to replace the property; potential income the property would produce if rented (taking into account operation costs); and any improvements or damages.
The percentage of market value that is assessed for a property’s taxation or tax liability is known as the assessment ratio. This can range from 100% –– meaning that the tax jurisdiction assesses a property’s full market value for taxation — to as low as 10%. So, a $1 million home located in a tax jurisdiction with a 20% assessment ratio will have an assessed value of $200,000, which is the amount that it will be taxed for.
What Is the Effective Tax Rate?
The effective tax rate — also referred to as millage or mill rate — is calculated by adding all of the mill levies or millage rates for each tax jurisdiction that the property is located in. For example, a home can fall under the tax jurisdiction of a city, county and school tax district. As a result, that property’s mill levy will be the sum of all three tax jurisdictions’ millage.
Mill rates are expressed in mills and represent the taxed amount per $1,000. meaning one mill equals one-thousandth of a dollar ($0.001 or 0.1 cents) or a millage rate of 0.001. If a school district has a mill of 30, then that school district’s millage rate will be 0.03, representing $30 of tax for every $1,000 of assessed value and resulting in a tax rate of 3%.
For example, Connecticut’s 2.14% effective tax rate means that owners of a $1 million home will be charged 21.4 mills or $21.4 for every $1,000 assessed value of their homes. In this case, in a jurisdiction where the assessment ratio is 20% of the property’s market value, a $1 million home will have a tax assessed value of $200,000 with a yearly property tax bill of $4,280. However, if the assessment ratio is 100%, the tax bill will be $21,400.
Millage rates or mills are determined by local governments’ budgetary needs divided by the value of all properties located in their jurisdiction. So, assuming the assessed property value in a specific area is $100 million and the budgetary needs are $10 million for the city, $4 million for the county, and $5 million for the school district, the city’s mill rate will be 0.1 ($10 million/$100 million), the county’s rate will be 0.04 and the school district’s 0.05, resulting in a total mill rate of 0.19 or 190 mills for a 19% tax rate.
Special Assessment Taxes
Local and state governments have the power to influence property tax bills by increasing or decreasing effective tax rates; granting or terminating tax exemptions; modifying the assessment ratio; increasing or decreasing the assessed value; or establishing additional special assessment taxes. Also referred to as a surtax, a special assessment tax is levied on property owners to garner funds for special or additional services and programs, usually in one specific area.
This can be achieved by levying an additional tax for a limited amount of time, such as a surtax charged for a limited number of years to add a new wing to a specific school or increase green spaces and bike lanes in a city.
It can also be achieved by creating a special assessment tax district to raise funds for specific services and programs, such as North Carolina’s fire tax and fire insurance districts or projects that will serve a specific area. For instance, homeowners in a newly built neighborhood may have a surtax added to their tax bill to fund infrastructure projects that will only benefit residents of that specific subdivision.
What Are Property Tax Exemptions?
While all states apply taxes to all properties, some individuals and organizations can benefit from partial or full property tax exemptions. Properties owned by the government and religious organizations are fully exempt across the U.S., and most states offer some form of property tax exemption to disabled veterans. Some states — such as Iowa — offer exemptions to all veterans.
Other individuals and properties that may benefit from full or partial exemptions include charitable organizations, wildlife habitats and nature conservation areas, urban and historic revitalization developments, low-income households, and individuals with disabilities, among others. Furthermore, full or partial exemptions are also often provided as incentives to businesses, organizations and individuals to boost local and state economies and/or revitalize specific areas.
Essentially, states and local governments have the power to designate tax exemption for individuals and organizations. And, similar to the effective tax rate, property tax exemptions can and do differ significantly by state and potentially within different areas of a state, as well.
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